In re Wakey

• Decision Date: 29 June 1931
• Docket Number: No. 4473.,4473.
• Citation: 50 F.2d 869
• Parties: In re WAKEY. CURTIS v. AMSLER.
• Court: U.S. Court of Appeals — Seventh Circuit

50 F.2d 869 (1931)

In re WAKEY CURTIS v. AMSLER.

No. 4473.

Circuit Court of Appeals, Seventh Circuit.

June 29, 1931.

W. I. Hibbs, Harold A. Butters, and A. E. Butters, all of Ottawa, Ill., for appellant.

Arthur H. Shay, of Streator, Ill., for appellee.

Before EVANS and SPARKS, Circuit Judges, and WILKERSON, District Judge.

EVANS, Circuit Judge.

This appeal involves a single question, the right of a mortgagee to receive the rents and profits collected by a trustee of the bankrupt estate of the mortgagor from the operation of a farm covered by the mortgage. The mortgage lien covered the "rents, issues and profits thereof," etc.

Mortgagor was duly adjudged a bankrupt when there was no default in the mortgage, either in interest or principal. The trustee in bankruptcy collected the rent for two years. Appellant, the mortgagee, then petitioned the court for an order directing the trustee to apply the rents and profits to the payment of the interest due upon the mortgage. The referee denied the petition, and his order was confirmed by the District Court. This appeal was taken from the court's order.

It is not questioned but that the rents and profits of land, as well as the land, may be the subject of a valid mortgage lien. Greenebaum Sons Bank & Trust Co. v. Kingsbury, 248 Ill. App. 321; Ortengren v. Rice, 104 Ill. App. 428; McLester v. Rose, 104 Ill. App. 433; First Nat. Bank of Joliet v. Illinois Steel Co., 174 Ill. 140, 51 N. E. 200; Bagley v. Illinois Trust & Savings Bank, 199 Ill. 76, 64 N. E. 1085. It seems equally clear in Illinois that the lien upon the rents and profits is not ordinarily enforceable until the mortgagee begins foreclosure proceedings, and a receiver, or other officer appointed by the court, takes possession of the property described in the mortgage. Dillon v. Dyer, 258 Ill. App. 144; St. Louis Union Trust Co. v. Wabash, Chester & Western Ry. Co., 258 Ill. App. 9; Taylor v. Osman, 239 Ill. App. 569; Anderson v. Frederickson, 252 Ill. App. 281; Rohrer v. Deatherage, 336 Ill. 450, 168 N. E. 266. After the appointment of such receiver in the mortgagee's suit, the mortgagee's right to the rents thereafter collected is clear. Rohrer v. Deatherage, 336 Ill. 450, 168 N. E. 266; Dillon v. Dyer, 258 Ill. App. 144; St. Louis Union Trust Co. v. Wabash, Chester & Western Ry. Co., 258 Ill. App. 9.

In this case the mortgagee made no application for permission to foreclose his mortgage, and not until after two years' rent had been collected by the trustee did he ask to have the same applied upon his mortgage. This failure on his part to assert his lien would have been fatal to his application here but for the intervention of the bankruptcy proceedings. Doubtless the bankruptcy proceedings and the appointment of the trustee dispensed with the requirement that the mortgagee should start foreclosure proceedings and secure the appointment of a receiver. For the mortgagee could not foreclose without the consent of the court, which had appointed a trustee to take possession of the property and collect the rents and profits. Isaacs, Trustee, v. Hobbs Tie & Timber Company, 282 U. S. 734, 51 S. Ct. 270, 75 L. Ed. 645, decided February 24, 1931.

But, while the institution of foreclosure proceedings was not necessary, the question arises: Was the mortgagee not required to make a demand on the trustee for the rents, and, if the demand be refused, to apply to the court for an order directing the trustee to apply the rents and profits upon the mortgage? Until such demand or application was made, should the rents and profits not pass to the trustee for the benefit of the general creditors?

Respecting the answer to this query, the authorities are seemingly not in accord. Collier on Bankruptcy, vol. 2, p. 1675, discusses the question and recognizes the divergence of opinion: "But, on the question as to whether rents collected from mortgaged premises of a bankrupt between adjudication of bankruptcy and sale under foreclosure proceedings belong to the mortgagee under a claim of deficiency or to the general creditors, there is a divergence of opinion. * * * The cases hold, in effect, that until the mortgagee has reduced the mortgaged premises to his possession, or has attached or sequestered the rents, the possession of the trustee is that of the mortgagor, and rents from the mortgaged premises, which, but for the bankruptcy would belong to the mortgagor, after bankruptcy belong to the trustee by virtue of his title and possession, and are therefore applicable to debts due the general creditors. There is an opposite line of authorities which takes the view that for many purposes the relative rights of creditors are to be regarded as fixed when bankruptcy takes place; that after insolvency has taken the mortgaged property out of the mortgagor's hands, its income or product belongs to the lien creditor, who has thus become the virtual owner; and that such income or product issuing from mortgaged property should not be diverted from the mortgage creditor who has a lien to general creditors who have no lien. This view is not based upon the notion that the mortgage confers a lien upon rents, for, of course, it does not; but it is based upon what is conceived to be an equitable adjustment of rights, of which some are obviously superior to others."

An examination of the authorities cited leads us to the conclusion that the weight, as well as the trend, of authorities, favors the position that appellant's lien was effective from the date of the trustee's appointment.

In the recent case of Mortgage Loan Co. v. Livingston (C. C. A.) 45 F.(2d) 28, 32, the court said:

"It is argued, and the lower court was of the view, that they...